What Prism Is:
For those who don’t know, “the Prism platform is the easiest and most secure way for investors to manage baskets of digital assets without having to trust a third-party with their funds.” Essentially you create a “Prism” on the Ethereum network which is a fund that tracks the prices of several cryptocurrencies of your choosing. The fund’s value is measured in Ether, and that is what you use to create it, and that is what you will receive your profits in. Shapeshift claims that another party (currently Shapeshift) will take the opposite side of your investments and consequently there will be no counterparty risk for the investor.
How Prism Works:
For the end user Prism is deceptively simple. You create a “Prism” on the Ethereum network (say 100% bitcoin), then you fund it with Ether. This gets locked up in a “smart contract” and if bitcoin goes up 25% you can close the Prism and withdraw 125% your original investment less fees.
In the words of Shapeshift CEO, this is what happens on the back end;
"The simplest explanation is you make a prism of 1 bitcoin, that's the whole prism. It's worth 1 bitcoin. Shapeshift takes the other side of that, so that means Shapeshift is short 1 bitcoin. Shapeshift just buys a bitcoin from someone, then if bitcoin goes up it lost $10 on the prism, but gained $10 on bitcoin, so it's a wash," ~ Erik Voorhees
What this boils down to is when you create a “Prism” of 1BTC, you end up paying Shapeshift to hold 1BTC for you – and that’s where the fees come in…
Prism’s Atrocious Fees:
Acording to Coinbase, investors will be charged a 2.4% fee to close out a prism, a 0.05ETH charge (about $9.61 at the time of writing) to cover the gas cost of creating the smart contract as well as a 1% monthly fee “to cover the cost of capital.” I am not sure about the specifics of these fees – whether the 1% monthly fee is charged at the beginning, end or highest/lowest point of value for the fund, but going back to our 1BTC example, an investor would be charged 0.024 BTC to create the fund and then 1% of the balance which would be 0.01BTC the first month. Doesn’t sound so bad? Prism is essentially a fund that can be easily liquidated so let’s compare this with the most similar conventional financial product – the ETF (Exchange Traded Fund).
Vanguard ETF’s have an average expense ratio (annual fees) of about 0.12%. They are very proud of this as it is lower than the industry average of 0.53%. To figure out Prism’s possible expense ratio I am using an example with $100 principle, assuming 10% ROI per month:
| Month | Balance without Prism | Balance with Prism | 1% Fee |
|---|---|---|---|
| 1 | $100.00 | $100.00 | $1.00 |
| 2 | $110.00 | $108.90 | $1.09 |
| 3 | $121.00 | $118.59 | $1.19 |
| 4 | $133.10 | $129.15 | $1.29 |
| 5 | $146.41 | $140.64 | $1.41 |
| 6 | $161.05 | $153.16 | $1.53 |
| 7 | $177.16 | $166.79 | $1.67 |
| 8 | $194.87 | $181.63 | $1.82 |
| 9 | $214.36 | $197.80 | $1.98 |
| 10 | $235.79 | $215.40 | $2.15 |
| 11 | $259.37 | $234.57 | $2.35 |
| 12 | $285.31 | $255.45 | $2.55 |
| Total fee: | $20.02 |
This amounts to an expense ratio of 11.69% per year. Shapeshift is charging almost One Hundred Times more than Vanguard to manage your money in effectively the same sort of financial asset, yet without all the protections a SEC regulated security requires.
Lack of audit reports:
On the official Prism website on their blog we are told that Piper Merriam (a respected Ethereum/Solidity security consultant) conducted a security audit of the Prism code earlier in the year. I have not seen anything on Piper’s blog that indicates this is in fact true. Shapeshift states that two more audits will be conducted while Prism is in Beta, but I will remain skeptical until I have seen something concrete.
Shapeshift’s deceptive marketing.
This is the only section where I take offense, and It is the main reason why I chose to write this article. The cryptosphere is unregulated and full of scam artists. One way we try to make sound investment choices is by finding industry professionals we can trust, and I think that we have a duty to expose influential people who are out to make money by deceiving their customers.
From the horse's mouth himself, Shapeshift’s CEO:
“Prism is a platform upon which humans and machines can acquire exposure to portfolios of digital assets without trusting a counterparty.”
– This is a blatant lie. The trusted counterparty is Shapeshift as they take the opposite side of the trade by buying and holding your coins for you.
“The Prism portfolios are fully-collateralized by both parties, so there is no risk of non-performance.”
– This might be true, however, there is no way of knowing. Shapeshift is framing this as “your funds are held in a smart contract” when in fact only the collateral you originally deposited is. You can’t hold Monero or Bitcoin in an Ethereum smart contract so shapeshift, presumably, will hold those coins for you. By cleverly obscuring the simple mechanism that drives Prism, Shapeshift has nobody calling for or expecting audits to verify their holdings reflect their Prism obligations.
“Risk is herein minimized: with trust placed in objective open-source code”
– Trust is not placed in the objective code, it is placed in shapeshift, as I have outlined above.
“While Prism is, in a sense, an exchange platform, to our knowledge nothing like it has ever existed in a live, production capacity. No bank or traditional financial institution, with their billions in capital and polished claims of consumer protection, has ever brought something like this to market.”
– this is a lie. Prism is a fund, like any other, except funds outside of the cryptosphere come with heavy regulation, consumer protection, and insurance. Prism does not.
Conclusion
The target market for this product is undoubtedly new money- people who are entering this turbulent and risky financial world and are bombarded with a steep learning curve of hashes and mining and lightning networks. The only thing they really understand is “altcoin x got me 1000% profit!” and Shapeshift is stepping in, telling them “everything is going to be ok as long as they hand us your money… don’t worry! There is no counterparty risk, we will take care of you for a small fee.”
Deceptive marketing has branded this product as an innovative, safe, "trustless" way to invest your money. I contend that the above evidence clearly shows that it actually requires a lot of trust! In my opinion It is another short-sighted reapplication of current technologies on the blockchain, however, in this case, its unnesecery, expensive and very very risky (you don't know whether Shapeshift is actually holding 1BTC for the 1BTC in your Prism).
I liked Shapeshift, but I won’t be using them anymore. In my opinion, Changely is a good alternative.
This is my first serious article on Steemit! I am open to any critisizms of my arguments, please let me know in the comments!
Sources
Shapeshift Prism Blog
Coindesk article
Vanguard fees
Piper Mirriam's Blog
Makes no sense to use it. Just buy whatever you want to buy and store it in your own wallet(s). Or if you want to hold an index fund Iconomi will come out with INCX soon and eventually have managed funds. But in the end the simplest way is to just buy the crypto you want.
I am skeptical of these "fund" ideas because without side chains somebody has to be in custody of the balance. bitTwenty is the best example of an asset pegged to multiple cryptos that I know of...
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Thanks. I was thinking about thinking creating a prism but now I'm reconsidering. Isn't Exodus similar to this?
Not exactly. Exodus is a wallet that incorporates Shapeshift functionality to allow the user to exchange additional tokens. There is a fee to exchange, and it's higher than you would get at a full-fledged exchange, but it's a convenience more than anything else. And there aren't any monthly fees like in Prism. Exodus supports about a dozen coins and tokens in total and they keep adding new ones.
Very interesting article. Indeed, 1% fee doesn't seem to be that much at first. But - comparatively - it is much more than most index funds.
This is wrong: "your funds are held in a smart contract” when in fact only the collateral you originally deposited is. You can’t hold Monero or Bitcoin in an Ethereum smart contract so shapeshift, presumably, will hold those coins for you."
Shapeshift actually deposits an equal amount of ETH into the smartcontract that only you can close (hence why it is fully collaterized). And that's also the reason that the prism automatically cashes out if profits reach 100%. You don't have to trust shapeshift to hold anything since they provide the collateral for any potential gains up front (up to a limit of 100% gains - but they are even planning to add an option to add more collateral later).
I agree that shapeshift hasn't been very clear with some of their communications and marketing, and you brought up a lot of good questions regarding audits etc, but at least on the collateral front, I consider them in the clear.
Hello,
Thanks for taking the time to write this article about Prism on STEEM. We value our user's feedback & appreciate the detailed overview of our product. We apologized for the delayed response & wanted to reach out about some of the points made about Prism.
Please feel free to shoot any questions that come to mind when reading this to [email protected]. If anything is unclear, we’re more than happy to elaborate.
Monthly fees: While Prism did have monthly fees in early beta, these have since been removed. One of the great things about having Prism in beta is that we get tons of incredible feedback from early users. After hearing from our community that these fees were too high, we decided to remove them.
The Nature of Prism: ShapeShift is, indeed, the counter-party on all Prisms during closed beta. But, because Prisms are fully collateralized (meaning, whatever amount--up to 10 ETH--the user puts into their Prism is matched by ShapeShift), users don’t have to trust that ShapeShift will pay its part at a later time. The smart contract generated upon Prism creation locks up both the users’ ETH and ShapeShift’s matching ETH. This means that users don’t have to trust a counter-party (in this case, ShapeShift), because the entire amount is held from the beginning.
This is why a user can only double the value of their ETH. Once it has been doubled, they’ll be in control of 100% of the ETH in that smart contract. As there’s no more value to gain, the Prism will auto-settle and the smart contract will release the users funds to them. If 4 ETH is put into a Prism, the user can rest assured that their Prism is now valued at 8 ETH.
Asset Exposure vs Asset Acquisition: To be clear, at no time does ShapeShift take possession of any coins for users. Prism is completely non-custodial. When a user creates a Prism, they merely get exposure to the value of the coins they select for the Prism. The value of that Prism will go up or down based on the value of the coins selected, but those selected coins are never purchased on behalf of the user. Users fund Prisms with ETH, the Prism value fluctuates based on the price of ETH relative to the assets in the Prism, and users receive ETH when they close their Prisms. Prism is completely denominated in ETH.
Conclusion: Indeed, competing products have appeared over the course of the last year, but no other product offers users exposure to digital assets like Prism. Prism removes the hassle of handling multiple wallets and private keys, as well as eliminating the security risk of holding assets on a centralized exchange. The combination of security and convenience enabled by the power of the Ethereum network and smart contracts make Prism a truly revolutionary product.
We hope this provides some clarity on Prism. Anyone interested in joining Prism’s closed beta can send an email to [email protected].
The point of the smart contract I expect is to trick you into thinking there is 0 counterparty risk. Really you are trusting that shapeshift will pay up when you withdraw so they are the counterparty risk.